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bigduckontax, Accountant

Category: Tax

Satisfied Customers: 4180

Experience: FCCA FCMA CGMA ACIS

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Pease help. We have owned a London property since 2006. Unfortunately

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Pease help. We have owned a London property since 2006. Unfortunately - due to redundancy - we could no longer afford the payments so we moved out of London in February 2012 and moved in firstly with family and since August 2012 have rented cheaper, smaller accommodation. Since April 2012 we have rented out the London property (to cover the mortgage) and gain some extra income. We have declared and paid tax on that income and switched to a buy-to-let mortgage.Having settled out of town, we would now like to sell our London property and buy locally. We have never owned a second property. Please can you confirm whether or not we are liable for Capital Gains Tax?

Yes, you will be liable to Capital Gains Tax (CGT), but your exposure will be limited. I assume in this answer that the property was jointly owned.

CGT will be apportioned to cover the time when you did not occupy and rented out the property. This is usually calculated on a monthly basis. You have owned for say 96 months of which you were in occupation for some 60 so only 0.375 of any gain you make would be subject to CGT. For each of you that would amount to 0.1875. You both have an Annual Exempt Allowance of 11.1K on top of which you would also be entitled to claim Lettings Relief, overall up to 40K.

Your gain is calculated by taking the purchase price plus costs (including stamp duty) and the selling price less the costs of sale. To the purchase price can be added any improvements, say a new kitchen or the installation of central heating. Improvements assist you by inflating the purchase price for the gain calculation.

Without full data on purchase, sale, improvements etc I cannot estimate the possible CGT liability, but it could be low or even nil.

CGT is an incredibly complex tax, but your involvement is not as bad as some. I do hope I have helped you with your problem.

Thank you. You are correct in your assumption that it is jointly owned. We believe that we will probably make a fairly substantial amount - possibly £450,000 (we are not entirely sure exactly what until we receive an offer). Assuming that is the case, 0.375 of that would be £168,750.Do I understand that we would then be entitled to relief of 40k + (11.1k x 2) - ie: £62.2k? This would mean the final taxable amount is £106,550 at 28% (joint income is approximately 90k). So a tax bill of £29,834. Still very hefty.If that is the case - are we:A) allowed to put the house in my wife's name only - her income is less than £20k so she may be liable to only an 18% rate?B) how long would we have to move back in for to "reinstate" the house as our principle home and thereby avoid CGT altogether? The tax bill is more than a year's annual rental income so we may be able to work out a way of doing that and "commute" to school! A pain but not impossibleReally appreciate your help...

I regret that I had not realised that the gain would be so great. I would not dispute your figures. The last one of these I did for a customer came out at a lemon! Your joint income is not actually relevant. It is your individual incomes taken separately which might reduce some of your wife's bill to CGT at 18%.

Sorry, but the transfer to your wife's sole name would merely introduce a break st the transfer date and would not help very much.

Moving back in would help a little bit as the proportion subject to CGT would be slightly reduced. You will appreciate that with figures at this level any improvement will result in a reduction in tax. If you stayed in for another year the proportion would be one third, say 56.25K. Better than a poke in the eye with a sharp stick!

I should not be ungrateful with the gains we have made but it seems harsh as our only reason for moving in the first place was because we lost our income temporarily, C'est la vie, The money we have made renting out for that whole period is only just covering the tax bill. A net loss you might say!Am I also right in saying that if we had sold a month ago we would have been liable for nothing as there was an 3 year exemption rather than 18 months? That is the last question - promise!

Correct, the Chancellor dropped the period to 18 months as a tax avoidance measure reduction. CGT is a very nasty tax which can strike quite unexpectedly. However, you rented out. Had you not done so then the position would have been different, but you wouldn't have received the income!

Just to give you a horror I covered the case of a mother who gave her house to her son which he did not occupy. Some years later she wanted it back. The tax bill for her son which she agreed to pay was a mere 40K; ouch!.

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